Audit Substantive Procedures (F8) PDF

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Audit Substantive ProceduresSubstantive Procedures for ReceivablesTriggerfish Co's draft year-end trade receivables are $3 (20X4: S2) and revenue for the year is slightly increased on 20X4. Triggerfish Co has a large number of customers with balances ranging from S5,000 to $45,000. A positive receiv...

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Audit Substantive Procedures Substantive Procedures for Receivables Triggerfish Co's draft year-end trade receivables are $3.85m (20X4: S2.45m) and revenue for the year is slightly increased on 20X4. Triggerfish Co has a large number of customers with balances ranging from S5,000 to $45,000. A positive receivables circularisation has been undertaken based on the year-end balances. The majority of responses from customers agreed to the balances as per Triggerfish Co's receivables ledger, however, the several exceptions were noted. Due to the increase in receivables, Triggerfish Co has recently recruited an additional credit controller to chase outstanding receivables. As a result of the additional focus on chasing outstanding receivables the finance director thinks it is not necessary to continue to maintain a significant allowance for receivables and has reduced the closing allowance from $125,000 to S5,000.

Substantive Procedures for Receivables 

Discuss with the finance director the rationale for not providing against any receivables and consider the reasonableness of the allowance.

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Obtain a breakdown of the opening allowance of $125,000 and consider if the receivables provided for in the prior year have been fully recovered as a result of the additional credit control procedures or if they have now been fully written off.

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Inspect the aged trade receivables ledger to identify any slow moving or old receivable balances and discuss the status of these balances with the credit controllers to assess whether they are likely to be received.

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Review whether there are any after-date cash receipts for identified slow moving/old receivable balances.

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Review customer correspondence to identify any balances which are in dispute or are unlikely to be paid and confirm if these have been considered when determining the allowance.

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Inspect board minutes to identify whether there are any significant concerns in relation to payments by customers and assess if these have been considered when determining the allowance.

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Recalculate the potential level of trade receivables which are not recoverable and compare to allowance and discuss differences with management.

Substantive Procedures for Receivables Harlem Co's finance director has informed you that in March 20X5 a significant customer was granted a payment break of 6 months, as it has been experiencing financial difficulties. Har1em Co maintains an allowance for trade receivables, and it is anticipated that this will remain at the same level as the prior year. The audit assistant has already calculated some key ratios for Harlem Co which you have confirmed as accurate. She has ascertained that the trade receivables collection period has increased from 38 to 51 days.

Substantive Procedures for Receivables 

Discuss with the finance director the rationale for not increasing the allowance for trade receivables and review its overall adequacy.

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Obtain a breakdown of the opening allowance and consider if the receivables provided for in the prior year have been recovered to assess the reasonableness of the prior levels of allowances.

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Review the aged trade receivables ledger to identify any slow moving or old receivable balances and discuss the status of these balances with the credit controllers to assess whether they are likely to be received.

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Review whether there are any after-date cash receipts for slow moving/old receivable balances.

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Review customer correspondence with the significant customer and others to identify any balances which are in dispute or are unlikely to be paid.

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Review board minutes to identify whether there are any significant concerns in relation to payments by customers.

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Calculate the potential level of trade receivables which are not recoverable and assess whether this is material or not and discuss with management.

Substantive Procedures for Receivables Jasmine Co’s trade receivables ledger is comprised of a large number of customers. In previous years, the audit team has undertaken a positive trade receivables circularisation to confirm yearend balances. However, the customer response rate has historically been low and so alternative audit procedures have been undertaken. A decision has been made that for the current year audit a circularisation will not be performed. The year-end trade receivables balance is $3.9m (20X7: $2.8m) and the allowance for trade receivables is $410,000 (20X7: $300,000).

Substantive Procedures for Receivables 

Obtain the aged receivables listing and agree to the balance on the sales ledger control account and trial balance.

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Review the aged trade receivables ledger to identify any slow moving or old balances, discuss the status of these balances with the credit controller to assess whether they are likely to pay.

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Select a representative sample of trade receivables and review for any after-date cash receipts. Ensure that a sample of slow moving/old receivable balances is also selected.

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Review customer correspondence to identify any balances which are in dispute or unlikely to be paid and discuss with management.

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Review board minutes to identify whether there are any significant concerns in relation to payments by customers. Calculate the average receivables collection period and compare this to the prior year and investigate any significant differences.

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Inspect post year-end sales returns/credit notes and consider whether an additional allowance against receivables is required.

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Obtain a breakdown of the allowance for trade receivables, recalculate and compare to any potentially irrecoverable balances to assess if the allowance is adequate.

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Select a sample of goods despatched notes (GDN) immediately before and after the year end and follow through to the receivables ledger to ensure they are recorded in the correct accounting period.

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Select a sample of year-end receivables balances and agree back to valid supporting documentation of sales invoices, GDNs and sales orders to ensure existence.

Substantive Procedures for Receivables 1 of Purrfect Co's major customers, Ellah Co, operates a chain of pet stores with 23 stores across the country. There have been reports in the press for several months that Ellah Go's sales and profits have been falling and, in March 20X5, Ellah Co announced that 11 of its stores were to close in May 20X5. As at 31 March 20X5, Purrfect Co's trade receivables included $2.6m outstanding from Ellah Co and no allowance has been included for this balance at the year end.

Substantive Procedures for Receivables 

Review correspondence with Ellah Co to establish if there was a discussion about payment difficulties and whether Ellah Co intends to fully settle the outstanding amount.

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Review the age of the outstanding debt with Ellah Co and discuss the circumstances with the credit controller to establish if it has exceeded the agreed credit terms and consider if an allowance is required.

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Review post year-end receipts from Ellah Co to establish how much of the debt was recovered by the audit completion date and to assess how much of the year-end balance remains outstanding.

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Inspect board minutes to identify whether there are any significant concerns in relation to payments by Ellah Co.

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Discuss with management of Purrfect Co why no allowance has been made in respect of this debt and assess the justification.

Substantive Procedures for Inventory Valuation Purrfect Co launched a new brand of vegan dog food, Vego Dog, in December 20X4 but sales have been lower than expected and the directors are considering a discounted sales price Vego Dog products are valued using a standard costing method and the standard cost comprises raw materials, labour costs and production overheads. As at 31 March 20X5, Vego Dog products with a standard cost of $2.4m were included as finished goods in inventory.

Substantive Procedures for Inventory Valuation 

Obtain and cast the inventory listing of Vego Dog products and agree the total cost of $2.4m to inventory records.

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Agree the quantity of Vego Dog products shown as held at the year end to the year-end inventory count records.

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Request a breakdown of the cost calculation of each unit of this product and discuss with management how the standard cost was derived.

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Recalculate the cost calculations to confirm that the quantity multiplied by the standard cost is $2.4m.

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For a sample of finished goods items, obtain standard cost cards and agree, Raw material costs to recent purchase invoices. Labour costs to time sheets or wage records. Overheads allocated to invoices and that they are of a production nature.

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Compare sales prices over time to establish if the price has been reduced because of falling demand to determine whether an allowance is required.

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Compare actual sales units per month to budgeted sales per month from before and after the year end to establish how much lower actual sales are than expected and discuss with management.

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Select a sample of items included in inventory of Vego Dog and review post year-end sales invoices to ascertain if net realisable value (NRV) is above cost or if an adjustment is required.

Substantive Procedures for Inventory Valuation Your firm attended the year-end inventory count for Hyacinth Co and confirmed that the controls and processes for recording work in progress (WIP) and finished goods were acceptable. WIP and finished goods are both material to the financial statements and the audit team was able to confirm both the quantity and stage of completion of WIP. Before goods are dispatched, they are inspected by the company’s quality control department. Just prior to the inventory count, it was noted that a batch of product line ‘Crocus’, which had been produced to meet a customer’s specific technical requirements, did not meet that customer’s quality and technical standards. This inventory had a production cost of $450,000. Upon discussions with the production supervisor, the finance director believes that the inventory can still be sold to alternative customers at a discounted price of $90,000.

Substantive Procedures for Inventory Valuation 

Obtain the breakdown of WIP and agree a sample of WIP assessed during the inventory count to the WIP schedule, agreeing the percentage completion to that recorded at the inventory count.

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For a sample of inventory items (finished goods and WIP), obtain the relevant cost sheets and agree raw material costs to recent purchase invoices, labour costs to time sheets or payroll records and confirm overheads allocated are of a production related nature.

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Examine post year-end credit notes to determine whether there have been returns which could signify that a write down is required.

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Select a sample of year-end finished goods and compare cost with post year-end sales invoices to ascertain if net realisable value (NRV) is above cost or if an adjustment is required.

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Discuss the basis of WIP valuation with management and assess its reasonableness.

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Select a sample of items included in WIP at the year end and ascertain the final unit cost price by verifying costs to be incurred to completion to relevant supporting documentation. Compare to the unit sales price included in sales invoices post year-end to assess NRV.

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Review aged inventory reports and identify any slow-moving goods, discuss with management why these items have not been written down or if an allowance is required.

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For the defective batch of product Crocus, review board minutes and discuss with management their plans for selling these goods, and why they believe these goods have a NRV of $90,000.

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If any Crocus products have been sold post year end, review the sales invoice to assess NRV.

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Agree the cost of $450,000 for product Crocus to supporting documentation to confirm the raw material cost, labour cost and any overheads attributed to the cost.

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Confirm if the final adjustment for the damaged product is $360,000 ($450,000 – $90,000) and discuss with management if this adjustment has been made. If so, follow through the write down to confirm.

Substantive Procedures for Inventory Valuation The finance director informed the audit manager that a problem arose in June 20X8 in relation to the mixing of materials within the production process for 1 particular product line. A number of these faulty paint products had already been sold and the issue was identified following a number of complaints from customers about the paint consistency being incorrect. As a precaution, further sales have been stopped and a product recall has been initiated for any of these specific paint products sold since June. Management is investigating whether the paint consistency of the faulty products can be rectified and subsequently sold.

Substantive Procedures for Inventory Valuation 

Obtain a breakdown of the damaged goods held in inventory and returned from customers and cast to confirm its accuracy.

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From the breakdown, agree the damaged goods quantities manufactured since June to production records; and agree to sales records the quantities sold.

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Agree on a sample basis the returns from customers as per the breakdown back to sales returns documentation to confirm the existence of the returns quantities.

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Discuss with management the current status of their plans for this product line and whether they are able to rectify the damage and then sell the goods on. If so, agree the costs of rectification to supporting documentation.

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If the damaged inventory has been rectified and sold post year end, agree to the sales invoice to assess NRV in line with the new cost of the product.

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Agree the cost of damaged goods to supporting documentation to confirm the raw material cost, labour cost and any overheads attributed to the cost.

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Discuss with management if the goods have been written down; if so, follow through the write down to the inventory valuation to confirm.

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Inspect monthly board meeting minutes from June 20X8 onwards to obtain further information regarding the faulty paint and its possible resale value.

Substantive Procedures for Bonuses Hart Co has a forecast profit before tax of $12.2m (20X4: $9.8m) and total assets are expected to be $28.5m (20X4: $24.3m). The finance director has indicated that the directors are very pleased with the forecast performance for the year as the directors are paid a bonus based on a percentage of profit before tax.

Substantive Procedures For Bonuses 

Obtain a schedule of the directors’ bonus and cast the schedule to ensure its accuracy. Agree the amount to that disclosed in the financial statements.

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Review the schedule of current liabilities and confirm the bonus accrual is included as a year-end liability.

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Agree the individual bonus payments to the post year-end payroll records.

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Recalculate the bonus payments and agree the criteria to supporting documentation and the percentage rates to be paid to the directors’ service contracts.

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Confirm the amount of each bonus paid by agreeing to the post year-end cash book and bank statements. Compare the profit before tax used in the bonus calculation to the final profit before tax figure to confirm whether any adjustment is required to the bonus paid and discuss any differences with management.

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Agree the amounts paid to each director to board minutes and contracts to ensure the amounts included in the current year financial statements are fully accrued and disclosed.

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Review the board minutes to identify whether any additional payments relating to this year have been agreed for any directors.

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Obtain a written representation from management confirming the completeness of directors’ remuneration including the bonus.

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Review the disclosures made regarding the bonus paid to directors and assess whether these are in compliance with local legislation.

Substantive Procedures for Bonuses The company’s board is comprised of 7 directors. They are each entitled to a bonus based on the draft year-end net assets, excluding intangible assets. Details of the bonus entitlement are included in the directors’ service contracts. The bonus, which related to the 20X8 year end, was paid to each director in February 20X8 and the costs were accrued and recognised within wages and salaries for the year ended 31 January 20X8. Separate disclosure of the bonus, by director, is required by local legislation.

Substantive Procedures for Bonuses 

Obtain a schedule of the directors’ bonus paid in February 20X8 and cast the schedule to ensure accuracy and agree amount disclosed in the financial statements.

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Review the schedule of current liabilities and confirm the bonus accrual is included as a year-end liability.

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Agree the individual bonus payments to the payroll records.

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Recalculate the bonus payments and agree the criteria, including the exclusion of intangible assets, to supporting documentation and the percentage rates to be paid to the directors’ service contracts.

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Confirm the amount of each bonus paid post year end by agreeing to the cash book and bank statements.

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Agree the amounts paid per director to board minutes to ensure the sums included in the current year financial statements are fully accrued and disclosed.

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Review the board minutes to identify whether any additional payments relating to this year have been agreed for any directors.

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Obtain a written representation from management confirming the completeness of directors’ remuneration including the bonus.

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Review the disclosures made regarding the bonus paid to directors and assess whether these are in compliance with local legislation.

Substantive Procedures for Income Vega Vista Co generates income in a number of ways. The main source of income is via an annual food and music festival held in September every year. Tickets, which cost $35, are sold in the 9-month period prior to Ille event and can be purchased in advance online or on the day of the event for cash. Approximately 15,000 people attended the September 20X4 event and more are anticipated for 20X5. At the event there are a number of stalls selling food and the charity receives a fixed percentage of these sundry sales. Also, during the festival, volunteers of the charity sign up individuals to make monthly donations, and these are paid by bank transfer to the charity. During the audit planning, the completeness and cut-off of income was flagged as a key audit risk.

Substantive Procedures for...